Visit vanguard.com or contact your broker to obtain a Vanguard ETF or fund prospectus which contains investment objectives, risks, charges, expenses, and other information; read and consider carefully before investing.

Vanguard ETF Shares are not redeemable with the issuing Fund other than in Creation Unit aggregations. Instead, investors must buy or sell Vanguard ETF Shares in the secondary market with the assistance of a stockbroker. In doing so, the investor may incur brokerage commissions and may pay more than net asset value when buying and receive less than net asset value when selling.

Investments in bond funds are subject to interest rate, credit, and inflation risk.

Diversification does not ensure a profit or protect against a loss in a declining market.

Stocks of companies in emerging markets are generally more risky than stocks of companies in developed countries.

An investment in a money market fund is not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency. Although a money market fund seeks to preserve the value of your investment at $1 per share, it is possible to lose money by investing in such a fund.

All investing is subject to risk, including possible loss of principal.

I’m a little tired of reading about how “buy and hold” is dead, and diversification doesn’t work, and how “target-date funds don’t work,” and that there was too much risk, especially for pre-retirees, in these balanced funds. These stories seem to continue regardless of what’s going on in the real world.

So I won’t discuss much. Instead, here’s some math.

Suppose you were 54 at the end of 1999. You had $50,000 in your 401(k). You planned to retire in 2010, when you turn 65. You were a big fan of diversification and balance, and wholeheartedly believed the buy-and-hold story, and so you used Vanguard Balanced Index Fund (view standardized performance) in your 401(k). Then, in June 2006, when Vanguard introduced the Target Retirement 2010 Fund (view standardized performance), you switched everything to that. You dutifully put $500 a month into your k-plan at the end of each month, every month, starting January 2000. What would your balance have been in September 2009?

This chart assumes funds were held in Investor Shares of Vanguard Balanced Index Fund (view standardized performance) from 12/31/1999 to 6/30/2006, then in Vanguard Target Retirement 2010 Fund (view standardized performance) from 7/1/2006 to 9/30/2009. The chart also assumes $500 deposits were made monthly at the end of each month beginning in January 2000, and that all fund distributions were reinvested. All returns are net of fees.

Two observations:

1. Your ending balance would have been a little less than $135,000, and your overall annualized internal rate of return (IRR) over this period would have been 3.07%. Nothing to write home about, but certainly not the end of the world. If you made regular deposits, you would have built a decent nest egg, in spite of two major bear markets. And you still have a year to go before you plan on retiring.

2. Even at the low point—the end of February 2009—your balance would have been roughly $101,000 (before your monthly contribution), and your annualized IRR would have been –0.50%. So, yes, you lost money—but, again, it’s not the end of the world.

I suppose things could have gotten a lot worse in February. And maybe they could get much worse from here. But even with little more than a single year’s time in between us and the beginning of the financial crisis, I can’t see what supports the notion that balanced investing “doesn’t work” or that the 401(k) system is dangerously broken …

• Investments in Target Retirement Funds are subject to the risks of their underlying funds. The year in the fund name refers to the approximate year (the target date) when an investor in the fund would retire and leave the work force. The fund will gradually shift its emphasis from more aggressive investments to more conservative ones based on its target date. An investment in a Target Retirement Fund is not guaranteed at any time, including on or after the target date.

• The performance data shown above represent past performance, which is not a guarantee of future results. Investment returns and principal value will fluctuate, so investors’ shares, when sold, may be worth more or less than their original cost. Current performance may be lower or higher than the performance data cited. For performance data current to the most recent month-end, visit Vanguard.com.

Like this:

John Ameriks

John Ameriks oversees the Active Equity Group within Vanguard Equity Investment Group, which manages active quantitative equity fund assets. He is one of Vanguard's thought leaders on retirement issues and has conducted studies on a wide range of personal financial decisions, including saving, portfolio allocation, and retirement income strategies. John came to Vanguard in 2003 from the TIAA-CREF Institute, the research and education arm of TIAA-CREF. He graduated from Stanford University with an A.B. and earned a Ph.D. in economics from Columbia University.

Comments

Anonymous | January 25, 2012 8:44 pm

Somehow, I don’t see ” it’s not the end of the world” as a ringing endorsement of the buy and hope strategy. In my own portfolio, I do have a number of mutual funds and I do tend to hold these for considerable periods. These are evaluated annually with laggards reduced in amount or sold and the money reinvested in other funds with better prospects. I also have a number of stocks that I buy, hold, and sell as conditions warrant. I am not an active trader but neither am I comatose as regards my holdings.

Anonymous | August 11, 2010 11:34 pm

I started with $0 in 2002. Been putting 10% of my salary, my company matches 100% up to 5% of my pay. Been managing my own portfolio since 2004. As I learned, one of the fund index I can put my money into is my company stock. So I’ve been doing the “buy high, sell low” method since 2004. Buy = moving my money to company stock, Sell = moving it back to stable value. As of today my balance is $225,914.00

Anonymous | March 7, 2010 11:16 am

Locking into a 6% CD in ’99 is not so bad, assuming that: 1) You decided that no matter what, going forward, you were happy locking into that 6% (I would be now, but was younger and didn’t have that perspective then); 2) you had a decade’s worth of monthly contributions available, in advance, back in ’99; 3) The bank in which you held the CD was not subsequently taken over by the Fed.

Anonymous | January 7, 2010 5:32 pm

Anonymous | November 14, 2009 8:01 pm

The system is flawed because of the large pot of ‘stupid’ money that is placed with active management. I say ‘stupid money’ respectfully because its unrealistic to expect most 401K contributors to do the required research for success, as most people have no clue and are too trusting, or too fearful. This is why the target retirement funds are needed and if the Vanguard index approach is the winning strategy, time will tell. Unfortunately, we invest now in this developmental age of getting retirement savings ‘right’, given the pension drought. So diversify with 50% or more indexed, the balance placed based on your own research, which may point to more indexing, or if you give it sufficient attention, maybe a winning active manager, they certainly exist. I do believe that indexing is stress reducing, maybe you can love your family or dog with greater focus. After awhile, placing funds correctly pays more than your job, then you’re ready to take more risk (active management) or reduce it with more indexing. Good luck, you are on your own.

Anonymous | November 4, 2009 10:27 pm

Anonymous | November 4, 2009 3:49 pm

3.07% return on a 401K over a 10 year period is a huge underperformanace for most of my middle income financial planning clients relative to the returns they NEEDED to get to achieve their goals. Let’s not “look at the math” in a vacuum that compares the Balanced Fund/TR2010 performance to nothing and doesn’t relate the results to the client’s needs!! Most of my clients absolutely need to work longer now because of “buy and hold” losses suffered last year. No, not the end of the world to be sure, but there can be no doubt that buy and hold let them down. They’d we WAY ahead of a 3.07% 10 year annualized return if they had staged themselves out of stocks as sheer speculation pushed the P/E10 every higher in the late 90’s. The P/E10 still suggests strongly that people near to or early in retirement should be almost completely out of stocks right now.

I think you’ve made the case that buy and hold is dead better than I ever could have!

Anonymous | October 30, 2009 12:05 am

Article was nice. But the performance was poor. If the people runing the Fund had tried to save the investors money, They would have a better return then 3.07%. Investors have to do their part. But the people runing the Fund have to do their part also, not set back and get paid to do nothing. If you were planing to use the money to add some cash to your SS check it will not last long. 200,000.00 is no money this world.

Anonymous | October 29, 2009 11:46 am

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Visit vanguard.com or contact your broker to obtain a Vanguard ETF or fund prospectus which contains investment objectives, risks, charges, expenses, and other information; read and consider carefully before investing.

Vanguard ETF Shares are not redeemable with the issuing Fund other than in Creation Unit aggregations. Instead, investors must buy or sell Vanguard ETF Shares in the secondary market with the assistance of a stockbroker. In doing so, the investor may incur brokerage commissions and may pay more than net asset value when buying and receive less than net asset value when selling.

Investments in bond funds are subject to interest rate, credit, and inflation risk.

Diversification does not ensure a profit or protect against a loss in a declining market.

Stocks of companies in emerging markets are generally more risky than stocks of companies in developed countries.

An investment in a money market fund is not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency. Although a money market fund seeks to preserve the value of your investment at $1 per share, it is possible to lose money by investing in such a fund.

All investing is subject to risk, including possible loss of principal.